The cost channel of monetary policy: The case of the United States in the period 1959–2018

Abstract

In light of the literature on the ‘price puzzle’, this paper shows that a positive effect of a tightening of monetary policy on the level of prices should be considered a normal phenomenon rather than an ‘anomaly’ or a ‘specific regime phenomenon’ connected to passive behaviour of the Central Bank in response to changes in the inflation rate. To assess the effect of monetary policy on the level of prices, we estimate SVAR models based on US monthly data for the period 1959–2018. Alternative measures of price and inflation expectations are also taken into consideration to avoid feasible spurious correlation. Finally, all selected models are estimated along four different sub-samples to consider different monetary policy regimes. Our findings show that the ‘price puzzle’ exists irrespective of both the passive (active) behaviour of the Central Bank and the inclusion of price expectations.